by Michael Arbow, MBA
Partner, RSD Solutions Inc.
Value investing as defined by Investopedia is a “strategy of selecting stocks that trade for less than their intrinsic values.” In my years with brokerage firms in the England and Canada, it was very rare that commodity stocks were ever viewed as value type investments as their prices tended to be asset bubble driven. But I have argued in the past that while commodity prices may fluctuate in the near term, in the long term the trend is up and at a rate faster than inflation. Joining the “choir” of this thought is much-admired value investor Jeremy Grantham; chairman of global asset manager GMO LLC a firm that manages more than $100-billion (U.S.). Mr. Grantham sites the usual reasons like increased world wealth (thanks Ben B.) but what seems to be the tipping point for Mr. Grantham is the fact that it took 100 years for the inflation adjusted price of commodities to fall 70% and only 8 years to wipe out those savings. Mr. Grantham now sees value in investing in commodities.
So what does this mean? To me it indicates that the natural resource countries, especially those that can produce commodities from below and above the surface are in for solid economic growth and currency appreciation likely for years to come. For commodity users and end sellers, hedging becomes more important to manage potentially highly variable cash flows. This trend is a now a reality so has your risk strategy adjusted?
For more on Mr. Grantham’s views on value investing in the commodity sector click on this Globe and Mail link:
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